2014 AND LOOKING FORWARD
Canadian M&A activity increased notably in 2014, reflecting the strengthening of the global economy, particularly in the U.S. The total value of Canadian announced deals to date (all numbers as of December 1, 2014) has been C$245.7-billion, which on an annualized basis reflects a 40.4-per-cent increase over 2013, which had been the weakest year in Canadian M&A since 2009.
There have been to date 51 “mega-deals” over US$1-billion announced in 2014 having an aggregate value of C$150.1-billion, which is a 107.9-per-cent increase as of the same date in 2013.
Canadian companies’ outbound M&A strengthened relative to inbound acquisitions and the U.S. was again the most popular target. Over 61 per cent of Canadian outbound M&A to date in 2014 involved U.S. targets.
Headline-making deals in 2014 included:
- Encana’s US$7.1-billion acquisition of Texas-based Athalon
- Burger King’s pending C$14.6-billion acquisition of Tim Hortons, structured as a corporate inversion
- Apollo Global Management’s purchase of Encana’s Bighorn assets for US$1.9-billion through Jupiter Resources
- Grupo Bimbo’s C$1.83-billion acquisition from Maple Leaf Foods of a 90-per-cent stake in Canada Bread
- Yamana Gold and Agnico Eagle Mines’s C$3.9-billion acquisition of Osisko Mining
There are a number of compelling reasons to be bullish on M&A activity levels in 2015. With commodity prices at their lowest level in years, opportunistic buyers may look to scoop up resource deals at a discount. The extended low interest environment may breathe new life into real estate-driven M&A, particularly among REITs and other commercial real estate vehicles. Overall, stronger economic activity is adding to the already flush cash reserves of companies in Canada and the U.S., who will need to deploy their capital. With the Canadian dollar in decline over the past 12 months, U.S. and international buyers may take advantage of the structural discount on Canadian acquisition prices.
Here are some of the developments and trends we see impacting Canadian M&A in 2015.
THE KING ORDERS A DOUBLE-DOUBLE
While Europe may have been the most frequent destination for U.S. companies contemplating “inversions” or similar cross-border transactions with tax benefits, U.S. companies looked north as well—with the deal causing the biggest stir being the pending C$14.6-billion transaction between Burger King and Tim Hortons. The U.S. reaction to the BK/Timmy’s deal was particularly interesting given that the transaction is arguably not a traditional “inversion” deal like recent examples in Europe where the driving purpose is to reduce U.S. tax. While there may be some tax advantages in moving the combined BK/Timmy’s head office to Canada, it has been widely noted that Canada’s Timmy’s was already the much larger of the two companies, and the decision to merge would have been driven heavily by operational synergies.
The subsequent announcement by the U.S. Department of the Treasury and the Internal Revenue Service of their intention to curb true inversions by reducing the tax benefits may slow the volume of these deals. However, U.S. companies may still benefit from inversion transactions with Canadian entities given Canada’s favorable corporate tax regime which, unlike the U.S., effectively does not tax the repatriation of offshore business income.
CSA & AMF CALL A TRUCE, BUT THE REAL FIGHT MAY BE JUST BEGINNING
After almost two years of discussion, the Canadian Securities Administrators (CSA) and Quebec’s Autorité des marchés financiers (AMF) have compromised on their desired approach to the regulation of shareholder rights plans. Canada’s securities regulators have reached agreement on a harmonized approach to updating the takeover bid rules and will be proposing amendments in 2015. The amendments will require that all bids: (i) be subject to a minimum 50-per-cent tender condition; (ii) remain open for at least 120 days, unless the target board waives that minimum in favor of a shorter period (not less than 35 days); and (iii) be extended for 10 days after the minimum tender condition has been met.
Until the CSA’s proposed amendments are implemented (likely mid-2015 at the earliest), it should be business as usual for takeover bids. For example, an unsolicited bidder will continue to apply to the relevant securities regulatory authority for an order cease-trading the target’s shareholder rights plan in order to permit its bid to proceed.
The progress made by the CSA to date may however be derailed in 2015 by the proposed cooperative capital markets regulatory system (Cooperative System), and in particular the draft Provincial Capital Markets Act(PCMA), released for comment in December. The PCMA, if brought into force, would replace the securities legislation in British Columbia, New Brunswick, Ontario, Prince Edward Island and Saskatchewan, and introduce sweeping and untested new changes to the regulation of capital markets in those provinces.
INFRASTRUCTURE: RISE IN SECONDARY MARKET EQUITY DEALS
2014 saw a rise in secondary market transactions in the infrastructure sector, a trend that we expect will continue. With a growing number of privately financed infrastructure projects having reached substantial completion of construction and entering into the operating phase, an equity exit is less complicated and often contemplated by the project agreements. These types of projects with long-term, stable cash flows backed by governments are attractive investments for equity players like pension funds that have substantial sums of cash to deploy. We expect sponsor-backed investors will continue to monetize their holdings and the secondary market to develop and mature. With the growing role of private finance in infrastructure projects in recent years, there will be continued investment opportunities brought to the secondary market as more projects reach construction completion.
U.S. PRIVATE EQUITY WILL INVEST IN CANADIAN ENERGY
Private equity firms are increasingly looking to the Canadian energy industry for investment opportunities, and more recently bargains, which we expect will gather additional steam in 2015. While certain funds have been active in the Canadian energy sector for a number of years, more firms are following suit and established players are expanding their presence. 2014 saw KKR open its Calgary office and Apollo purchase nearly C$2-billion worth of energy assets from Encana. With renewed focus on LNG and opportunities in oilfield services, all signs point to PE increasing its presence in the Canadian energy sector.
ALL’S FAIR WITH ARRANGEMENT FAIRNESS OPINIONS
A number of decisions in 2014 clarified the role of fairness opinions in M&A transactions undertaken by way of plan of arrangement. Following some uncertainty created by the decision in Champion Iron Mines Limited (Re), which suggested that fairness opinions must be in a form that meets the court’s onerous standards for admissible expert evidence, the more recent decisions affirmed that a court can consider the fact that a fairness opinion was obtained by the target, as distinct from the contents of that fairness opinion, as a factor in its decision that an arrangement meets the requisite test of being fair and reasonable.
In our upcoming 2015 edition of the Blakes Public M&A Deal Study, we determined 100 per cent of the transactions we reviewed over a 12-month period included at least one fairness opinion and 18 per cent included two or more fairness opinions:
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In what percentage of transactions was the specified number of fairness opinions obtained by the Target ?
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CANADIAN PENSION FUNDS LOOK FOR GROWTH INTERNATIONALLY
“Like many pension funds, we are somewhat Canada-heavy, but we are more than willing to participate in attractive domestic opportunities. However, Canada is a small part of the international asset market and global diversification is key to earning high long-term return on investment risk for our clients," says Leo de Bever, Chief Executive Officer, Alberta Investment Management Corporation (AIMCo).
With their continued focus on active investments and healthier returns, Canadian pension funds are actively looking for more opportunities outside of Canada, particularly in the real estate and infrastructure sectors. 2014 saw Canada’s largest p-funds make investments across the globe, from airports in the United Kingdom to real estate in Brazil. With limited domestic opportunities in which to deploy capital and significant anticipated growth in emerging markets, we expect the p-funds to continue expanding their global asset portfolios.
ALBERTA CALLS FOR RETURN OF ASIAN INVESTMENT
Two years after the federal government enacted policies governing investments into Canada by state-owned enterprises (SOEs), the Alberta government is hoping to have some of the rules either revisited or clarified in an effort to spur foreign investment. Alberta believes that the SOE rules, enacted in response to a few high-profile, high-dollar value investments by Asian SOEs, have caused confusion and hesitation amongst other foreign sources of capital who are unclear whether the rules apply to them. This is especially true in jurisdictions like China, where the line between a stand-alone commercial entity and SOE is complex.
REP & WARRANTY INSURANCE ON THE RISE
While still lagging behind Europe and the United States, the use of rep & warranty insurance in Canada has picked up steam and is expected to continue. There are numerous instances in private acquisitions where rep & warranty insurance may be helpful, including to a buyer seeking to differentiate its bid in a competitive auction or to a private equity-backed vendor looking for a clean exit without trailing indemnity commitments or escrowed proceeds. More Canadian transactions will utilize rep & warranty insurance in 2015 to get the deal done.
CANADIAN BUYERS WILL TAP HIGH-YIELD MARKETS TO FINANCE ACQUISITIONS
2014 saw an upswing in Canadian issuers accessing the high-yield markets. While some companies have included high-yield as one aspect of an overall corporate finance program, others have been financing acquisitions both at home and abroad with the debt. Notably, 2014 saw some of Canada’s largest M&A transactions funded, at least in part, from proceeds of high yield-debt offerings, including Baytex Energy’s acquisition of Aurora Oil & Gas, Jupiter Resources’s acquisition of assets from Encana and Yamana Gold’s acquisition of Osisko Mining. Given the continuance of historically low interest rates, we expect more Canadian issuers to access the debt markets for acquisition financing in 2015.